10QSB 1 v75150e10qsb.txt FORM 10-QSB FOR PERIOD JUNE 30, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001. OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION FROM _______ TO ________. COMMISSION FILE NUMBER 000-26175 DISCOVERY INVESTMENTS, INC. (Exact name of registrant as specified in its charter) Nevada 88-0409151 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6767 W. Tropicana Avenue, Suite 207 Las Vegas, Nevada 89103 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (702) 248-1047 N/A ---------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] -1- 2 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
Class Outstanding at June 30, 2001 ----- ---------------------------- Common Stock, par value 2,100,000 $.001 per share
Transitional Small Business Disclosure Format: Yes [ ] No [X] -2- 3 PART I FINANCIAL INFORMATION Item I. Financial Statements DISCOVERY INVESTMENTS, INC. (A Development Stage Company) FINANCIAL REPORTS JUNE 30, 2001 DECEMBER 31, 2000 -3- 4 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) CONTENTS INDEPENDENT AUDITOR'S REPORT ON THE FINANCIAL STATEMENTS 1 FINANCIAL STATEMENTS Balance Sheets 2 Statements of Income 3 Statements of Stockholders' Equity 4 Statements of Cash Flows 5 Notes to Financial Statements 6-8 ----------------------------------------------------------------------------
-4- 5 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Discovery Investments, Inc. Las Vegas, Nevada I have audited the accompanying balance sheet of Discovery Investments, Inc. (A Development Stage Company) as of June 30, 2001 and December 31, 2000 and the related statements of income, stockholders' equity, and cash flows for the three months ended June 30, 2001, the six months ended June 30, 2001 and the year ended December 31, 2000 and the period September 10, 1996 (date of inception) through June 30, 2001. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Discovery Investments, Inc. (A Development Stage Company) as of June 30, 2001 and December 31, 2000 and the results of its operations and cash flows for the three months ended June 30, 2001, the six months ended June 30, 2001, the year ended December 31, 2000 and the period September 10, 1996 (date of inception) through June 30, 2001, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company has no operations and has no established source of revenue. This raises substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 4 and Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Kyle L. Tingle Certified Public Accountant August 13, 2001 Henderson, Nevada -5- 6 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (RESTATED) ASSETS
June 30, December 31, December 31, 2001 2000 1999 ----------- ------------ ------------ CURRENT ASSETS $ 0 $ 0 $ 0 ----------- ----------- ----------- Total current assets $ 0 $ 0 $ 0 ----------- ----------- ----------- Total assets $ 0 $ 0 $ 0 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short term notes payable $ 100,000 $ 100,000 $ 0 Accounts payable 98,660 93,792 0 Interest payable 267,000 186,000 25,000 Officers advances (Note 5) 17,576 16,501 15,654 ----------- ----------- ----------- Total current liabilities $ 483,236 $ 396,293 $ 40,654 ----------- ----------- ----------- LONG TERM DEBT $ 1,500,000 $ 1,500,000 $ 1,500,000 Total liabilities $ 1,983,236 $ 1,896,293 $ 1,540,654 ----------- ----------- ----------- STOCKHOLDERS' EQUITY Common stock: $0.001 par value; authorized 25,000,000 shares; issued and outstanding: 2,100,000 shares at December 31, 1999; 2,100 2,100,000 shares at December 31, 2000 2,100 2,100,000 shares at June 30, 2001 2,100 Additional Paid In Capital 0 0 0 Accumulated deficit during development stage (1,985,336) (1,898,393) (1,542,754) ----------- ----------- ----------- Total stockholders' equity $(1,983,236) $(1,896,293) $(1,540,654) ----------- ----------- ----------- Total liabilities and stockholders' equity $ 0 $ 0 $ 0 =========== =========== ===========
See Accompanying Notes to Financial Statements. -6- 7 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF INCOME (RESTATED)
Three Months Ended Six Months Ended ------------------------------- ------------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (unaudited) (unaudited) Revenues $ 0 $ 0 $ 0 $ 0 Cost of revenue 0 0 0 0 ----------- ----------- ----------- ----------- Gross profit $ 0 $ 0 $ 0 $ 0 General, selling and administrative expenses 4,868 0 5,943 100,000 ----------- ----------- ----------- ----------- Operating (loss) $ (4,868) $ 0 $ (5,943) $ (100,000) Nonoperating income (expense) Interest expense $ (40,500) $ (40,500) $ (81,000) $ (180,000) ----------- ----------- ----------- ----------- Net (loss) $ (45,368) $ (40,500) $ (86,943) $ (180,000) =========== =========== =========== =========== Net (loss) per share, Basic and diluted (Note 2) $ (0.02) $ (0.02) $ (0.04) $ (0.09) =========== =========== =========== =========== Average number of shares of common stock outstanding 2,100,000 2,100,000 2,100,000 2,100,000 =========== =========== =========== ===========
See Accompanying Notes to Financial Statements. -7- 8 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF INCOME (RESTATED)
Sept 10, 1996 Year Ended Year Ended (inception) to December 31, December 31, June 30, 2000 1999 2001 ------------ ------------ -------------- Revenues $ 0 $ 0 $ 0 Cost of revenue 0 0 0 ----------- ----------- ----------- Gross profit $ 0 $ 0 $ 0 General, selling and administrative expenses 194,639 1,515,654 1,713,468 ----------- ----------- ----------- Operating (loss) $ (194,639) $(1,515,654) $(1,713,468) Nonoperating income (expense) Interest expense (161,000) (25,000) (226,500) ----------- ----------- ----------- Net (loss) $ (355,639) $(1,540,654) $(1,939,968) =========== =========== =========== Net (loss) per share, Basic and diluted (Note 2) $ (0.17) $ (0.73) $ (0.92) =========== =========== =========== Average number of shares of common stock outstanding 2,100,000 2,100,000 2,100,000 =========== =========== ===========
See Accompanying Notes to Financial Statements. -8- 9 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (RESTATED)
Accumulated (Deficit) Common Stock Additional During ------------------------------- Paid-In Development Shares Amount Capital Stage ----------- ----------- ----------- ----------- Sale of 2,100,000 shares, Sept. 10, 1996 2,100,000 $ 2,100 $ 0 $ 0 Net (loss), December 31, 1996 (2,100) ----------- ----------- ----------- ----------- Balance, December 31, 1996 2,100,000 $ 2,100 $ 0 $ (2,100) Net (loss), December 31, 1997 0 ----------- ----------- ----------- ----------- Balance, December 31, 1997 2,100,000 $ 2,100 $ 0 $ (2,100) Net (loss), December 31, 1998 0 ----------- ----------- ----------- ----------- Balance, December 31, 1998 2,100,000 $ 2,100 $ 0 $ (2,100) March 15, 1999, changed from no par value to $0.001 (2,079) 2,079 March 15, 1999, forward stock 100:1 2,079 (2,079) Net (loss), December 31, 1999 (1,540,654) ----------- ----------- ----------- ----------- Balance, December 31, 1999 2,100,000 $ 2,100 $ 0 $(1,542,754) Net (loss), December 31, 2000 (355,639) ----------- ----------- ----------- ----------- Balance, December 31, 2000 2,100,000 $ 2,100 $ 0 $(1,898,393) Net (loss), June 30, 2001 (86,943) Balance, June 30, 2001 2,100,000 $ 2,100 $ 0 $(1,985,336) =========== =========== =========== ===========
See Accompanying Notes to Financial Statements. -9- 10 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (RESTATED)
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 --------- --------- --------- --------- (unaudited) (unaudited) Cash Flows From Operating Activities Net (loss) $ (45,368) $ (40,500) $ (86,943) $(180,000) Adjustments to reconcile net (loss) to cash (used in) operating activities: Changes in assets and liabilities Increase in accounts payable and accrued expenses 45,368 40,500 85,868 80,000 Officer advances 0 0 1,075 0 --------- --------- --------- --------- Net cash (used in) operating activities $ 0 $ 0 $ 0 $(100,000) --------- --------- --------- --------- Cash Flows From Investing Activities $ 0 $ 0 $ 0 $ 0 --------- --------- --------- --------- Cash Flows From Financing Activities Issuance of common stock $ 0 $ 0 $ 0 $ 0 Proceeds from notes payable 0 0 0 100,000 --------- --------- --------- --------- Net cash provided by financing activities $ 0 $ 0 $ 0 $ 100,000 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents $ 0 $ 0 $ 0 $ 0 Cash and cash equivalents, beginning of period 0 $ 0 0 0 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 0 $ 0 $ 0 $ 0 ========= ========= ========= =========
See Accompanying Notes to Financial Statements. -10- 11 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (RESTATED)
Sept. 10, 1996 Year Ended Year Ended (inception) to December 31, December 31, June 30, 2000 1999 2001 ----------- ----------- -------------- Cash Flows From Operating Activities Net (loss) $ (355,639) $(1,540,654) $(1,985,336) Adjustments to reconcile net (loss) to cash (used in) operating activities: Changes in assets and liabilities Increase in accounts payable and accrued expenses 254,792 25,000 365,660 Officer advances 847 15,654 17,576 ----------- ----------- ----------- Net cash (used in) operating activities $ (100,000) $(1,500,000) $(1,602,100) ----------- ----------- ----------- Cash Flows From Investing Activities $ 0 $ 0 $ 0 ----------- ----------- ----------- Cash Flows From Financing Activities Issuance of common stock $ 0 $ 0 $ 2,100 Proceeds from notes payable 100,000 1,500,000 1,600,000 ----------- ----------- ----------- Net cash provided by financing activities $ 100,000 $ 1,500,000 $ 1,602,100 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents $ 0 $ 0 $ 0 Cash and cash equivalents, beginning of period 0 0 0 ----------- ----------- ----------- Cash and cash equivalents, end of period $ 0 $ 0 $ 0 =========== =========== ===========
See Accompanying Notes to Financial Statements. -11- 12 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: Discovery Investments, Inc. ("Company") was organized September 10, 1996 under the laws of the State of Nevada. The Company currently has no operations and, in accordance with Statement of Financial Accounting Standard (SFAS) No. 7, "Accounting and Reporting by Development Stage Enterprises," is considered a development stage company. A summary of the Company's significant accounting policies is as follows: Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash For the Statements of Cash Flows, all highly liquid investments with maturity of three months or less are considered to be cash equivalents. There were no cash equivalents as of June 30, 2001 and December 31, 2000 and 1999. Income taxes Income taxes are provided for using the liability method of accounting in accordance with SFAS No. 109 "Accounting for Income Taxes." A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. Reporting on costs for start-up activities Statement of Position 98-5 ("SOP 98-5), "Reporting on the Costs of Start-Up Activities" which provides guidance on the financial reporting of start-up and organization costs, requires most costs of start-up activities and organization costs to be expensed as incurred. With the adoption of SPO 98-5, there has been little to no effect on the Company's financial statements. Year End The Company originally selected March 31 for its fiscal year end. Prior to the Mutual Rescission Agreement and Mutual Release (see Note 9) the Company changed its fiscal year end to December 31. -12- 13 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 2. NOTES PAYABLE As of June 30, 2001, the Company had a short term note payable of: 12% Note Payable to Interlochen Enterprises, Inc. dated January 28, 2000, interest due quarterly, principal payable on demand $ 100,000 ========= NOTE 3. CONVERTIBLE DEBT On December 10, 1999, the Company, subject to the closing of the Plan and Agreement of Reorganization, the Company issued six (6) three-year 10 Percent Convertible Debentures to various parties in the aggregate amount of $1,500,000, dated as of November 1, 1999 which closed on December 20, 1999. The terms and conditions are summarized as follows: (1) All debentures of this issue rank equally and ratably without priority over one another. (2) Provided that the Company becomes obligated, the holder or holders of this Debenture may at any time prior to the maturity hereof (except that, if the Company has called the debenture for redemption, the right to convert shall terminate at the close of business on the second business day prior to the day fixed as the date for such redemption), convert the principal amount hereof into the Company's common stock at the conversion ratio of $5 of debenture principal for one share of common stock. To convert the debenture, the holder or holders hereof must surrender the same at the office of the Company, together with a written instrument of transfer in a form satisfactory to the Company, properly completed and executed and with a written notice of conversion. (3) If the Company at any time pays to the holders of its common stock a dividend in common stock, the number of shares of common stock issuable upon the conversion of the debenture shall be proportionally increased, effective at the close of business on the recorded date for determination of the holders of the common stock entitled to the dividend. (4) If the Company at any time subdivides or combines in a larger or smaller number of share its outstanding shares of common stock, then the number of shares of common stock issuable upon the conversion of the debenture shall be proportionally increased in the case of a subdivision and decrease in the case of a combination, effective in either case at the close of business on the date that the subdivision or combination becomes effective. (5) If the Company is recapitalized, consolidate with or merged into any other corporation, or sells or conveys to any other corporation all or substantially all of its property as an entity, provision shall be made as part of the terms of the recapitalization consolidation merger, sale, or conveyance so that the holder or holders of the debenture may receive, in lieu of the common stock otherwise issuable to them upon conversion hereof, at the same conversion ratio, the same kind and amount of securities or assets as may be distributable upon the recapitalization, consolidation, merger, sale, or conveyance with respect to the common stock. -13- 14 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 2. CONVERTIBLE DEBT (CONTINUED) (6) In lieu of issuing any fraction of a share upon the conversion of the debenture, the Company shall pay to the holder hereof for any fraction of a share otherwise issuable upon the conversion cash equal to the same fraction of the ten current per share market price of the common stock. (7) In the event Company fails to make any payment of principal and interest, said failure to pay shall constitute a default under the terms of the debenture and, subject to the terms and conditions contained in the debenture, the entire unpaid principal and interest shall be due an payable. No debenture holder may institute any suit or proceeding for the enforcement of the payment of principal or interest unless the holders of more than 25 percent in amount of all outstanding debentures of the issue join in the suit or proceeding. In the event the Company and the shareholders of LLO-Gas, Inc. do not enter into a business combination which closes on or before December 31, 1999, an individual debenture holder may institute any suit or proceeding in the event of default. (8) Company and LLO-Gas, Inc. may at any time prepay in whole or in part, the principal amount, plus accrued interest lot he date of prepayment, of all outstanding debentures of this issue, upon 30 days written notice by certified or registered mail to the registered owners of all outstanding debentures. (9) Except for debenture number 1 and 2, for which John Castellucci is obligated for an amount equal to $150,000, the debenture is the obligation of Company and LLO-Gas, Inc. only, and no recourse shall be had for the payment of any principal or interest thereof against any shareholder, officer or director of Company and LLO-Gas, Inc., either directly or through Company and LLO-Gas, Inc., by virtue of any statute for the enforcement of any assessment or otherwise. Three Year 10% Convertible Note Number 1 payable to Interlochen Enterprises, Inc. dated as of November 1, 1999, interest due quarterly, principal due October 31, 2002 $ 250,000 Three Year 10% Convertible Note Number 2 payable to Meridian Enterprises, Inc. dated as of November 1, 1999, interest due quarterly, principal due October 31, 2002 250,000 Three Year 10% Convertible Note Number 3 payable to CRS Financial Corp., Ltd. dated as of November 1, 1999, interest due quarterly, principal due October 31, 2002 250,000 Three Year 10% Convertible Note Number 4 payable to CRS Financial Corp., Ltd. dated as of November 1, 1999, interest due quarterly, principal due October 31, 2002 250,000 Three Year 10% Convertible Note Number 5 payable to CRS Financial Corp., Ltd. dated as of November 1, 1999, interest due quarterly, principal due October 31, 2002 250,000 Three Year 10% Convertible Note Number 6 payable to CRS Financial Corp., Ltd. dated as of November 1, 1999, interest due quarterly, principal due October 31, 2002 250,000 ----------- $1,500,000 ===========
-14- 15 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 3. STOCKHOLDERS' EQUITY (CONTINUED) Common stock The authorized common stock of the Company consists of 25,000,000 shares with par value of $0.001. On September 15, 1996, the Company authorized and issued 21,000 shares of its no par value common stock in consideration of $2,100 in cash. On March 15, 1999, the State of Nevada approved the Company's amended Articles of Incorporation, which increased its capitalization from 25,000 common shares to 25,000,000 common shares. The no par value was changed to $0.001 per share. Also, on March 15, 1999, the Company's shareholders approved a forward split of its common stock at one hundred shares for one share of the existing shares. The number of common stock shares outstanding increased from 21,000 to 2,100,000. Prior period information has been restated to reflect the stock split. The Company has not authorized any preferred stock. Pledge John Castellucci entered into a Pledge Agreement with M. Mehdi Mostaedi on or about December 16, 1999, subject to the closing of the Plan and Agreement of Reorganization on December 20, 1999 (see Note 9), wherein John Castellucci collaterally pledged 2,000,000 shares of his common stock of the Company to M. Mehdi Mostaedi. A mutual rescission occurred (see Note 9) and said rescission is subject to the rights, if any, that M. Mehdi Mostaedi may have under said collateral pledge agreement. Upon full performance by John Castellucci and LLO-Gas, Inc., or either, said shares of common stock will be retired and restored to the status of authorized and unissued shares. The pledge holder under the collateral pledge agreement holds as collateral certain shares of LLO-Gas, Inc. as additional substituted collateral, under the collateral pledge agreement. To the extent that any shares of stock issued to John Castellucci have not been restored to the Company as part of the mutual rescission, the Company deems said shares to be treasury shares. Treasury shares do not carry voting rights or participate in distribution, may not be counted as outstanding shares for any purpose and may not be counted as assets of the Company for purposes of computing amounts available for distributions. Upon physical delivery of said certificates to Pacific Stock Transfer Company, the Company's transfer agent, said shares will be canceled, retired and restored to the status of authorized and unissued shares in accordance with law. Net loss per common share Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." The weighted-average number of common shares outstanding during each period is used to compute basic loss per share. Diluted loss per share is computed using the weighted averaged number of shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. Basic net loss per common share is based on the weighted average number of shares of common stock outstanding of 2,100,000 during 2001, 2000, 1999, and since inception. As of June 30, 2001 and December 31, 2000 and 1999 and since inception, the Company had no dilutive potential common shares. -15- 16 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 4. INCOME TAXES There is no provision for income taxes for the period ended June 30, 2001, due to the net loss and no state income tax in Nevada, the state of the Company's domicile and operations. The Company's total deferred tax asset as of June 30, 2001 is as follows: Net operating loss carry forward $ 1,985,336 Valuation allowance $(1,985,336) ------------ Net deferred tax asset $ 0
The net federal operating loss carry forward will expire between 2016 and 2020. This carry forward may be limited upon the consummation of a business combination under IRC Section 381. NOTE 5. GOING CONCERN The Company's financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently, the Company does not have significant cash of other material assets, nor does it have operations or a source of revenue sufficient to cover its operation costs and allow it to continue as a going concern. It is the intent of the Company to seek a merger with an existing, operating company. Until that time, the stockholders, officers, and directors have committed to advancing the operating costs of the company. Do to the unusual nature described in Notes 8 and 9, subsequent to the balance sheet date, the Company filed for protection under Chapter 11 of the Bankruptcy Code. See Note 10 for description of the Plan of Reorganization. NOTE 6. RELATED PARTY TRANSACTIONS The Company neither owns nor leases any real or personal property. An officer of the corporation provides office services without charge. Such costs are immaterial to the financial statements and accordingly, have not been reflected therein. The officers and directors for the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interest. The Company has not formulated a policy for the resolution of such conflicts. NOTE 7. WARRANTS AND OPTIONS There are no warrants or options outstanding to acquire any additional shares of common stock of the Company. NOTE 8. LITIGATION (a) On February 29, 2000, West Star Energy Group, Inc. ("West Star") sued John Castellucci, the Company and its wholly-owned operating subsidiary, LLO-Gas, Inc., in the Superior Court of the State of California, County of Los Angeles (Case Number BC 225568). Until August 10, 2000, John Castellucci was President, Chief Financial Officer, Secretary, director and the principal shareholder of the Company, and President, a director and the principal shareholder of West Star. West Star, through its Board of Directors (other than John Castellucci), alleges that John Castellucci breached his fiduciary duty to West Star and engaged in a series of -16- 17 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 8. LITIGATION (CONTINUED) unauthorized transactions for his personal benefit. The plaintiff also alleges that John Castellucci made certain fraudulent statements to the West Star Board of Directors, which inducted them not to exercise a West Star business opportunity to acquire the ARCO Facilities for itself and to consent to the acquisition of the ARCO Facilities by LLO-Gas, Inc. On April 26, 2000, West Star dismissed the entire action as to all parties with prejudice. West Star had sought general and special damages of $3.5 million against John D. Castellucci, the imposition of a constructive trust on the Company's facilities which were purchased from ARCO (the "ARCO Facilities"), an order compelling the Company to return the ARCO Facilities, an accounting, and the cost of the suit, prejudgment interest, attorneys' fees and such other relief as the court may deem just and proper. (b) In December 1999, M. Mehdi Mostaedi loaned LLO-Gas, Inc. $150,000. LLO-Gas, Inc. and John Castellucci jointly executed a promissory note dated December 16, 1999 (the "Mostaedi Note") in the principal amount of $150,000. The Mostaedi Note bears interest at the rate of 9% per annum and was due and payable as to principal and interest on February 16, 2000. The Mostaedi Note was secured with a pledge of 2,000,000 shares of the Company's common stock owned by John Castellucci pursuant to a Pledge Agreement dated December 20, 1999 between John Castellucci and M. Mehdi Mostaedi. The pledge holder currently hold John Castellucci's shares in LLO-Gas, Inc. as collateral for the obligation. On April 11, 2000, M. Mehdi Mostaedi filed a lawsuit against the Company and John Castellucci in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC 016250), alleging breach of contract and default under the Mostaedi Note. M. Mehdi Mostaedi seeks damages in the amount of $150,000, interest on that amount at the rate of 9% from December 16, 1999, and costs of the suit. The Company has been served with the complaint but has not filed an answer to the complaint. On or about August 17, 2000, M. Mehdi Mostaedi filed a request to enter the default against the Company (and John Castellucci). On May 31, 2001, Judgment was entered, after default, by the Court, in favor of M. Mehdi Mostaedi and against John D. Castellucci and Company (LLO-Gas, Inc. and the Doe Defendants were dismissed). Judgment was for the principal sum of $150,000, interest through May 31, 2001 of $13,610.96, attorneys' fees of $3,290.00 for a total of $166,900.96, with costs of $267.00. The Company disputes the existence of the obligation and no notice of entry of judgment has been served upon the Company. M. Mehdi Mostaedi may be required to file a proof of claim in the Chapter 11 proceeding to have any rights adjudicated. (c) On October 17, 2000, Yuri Zaloznyy ("Zaloznyy") sued John Castellucci, the Company, LLO-Gas, Inc., and others, in an adversary proceeding in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division. Zaloznyy seeks general and special damages from all defendants for breach of contract, fraud, breach of fiduciary duty, conversion, constructive trust, fraudulent or void conveyance, specific performance, dissolution of certain of the defendants, and damages. The Company has filed an answer to the complaint, -17- 18 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 8. LITIGATION (CONTINUED) severing itself from all other defendants to include John Castellucci and LLO-Gas, Inc. The Company believes that it has meritorious defenses and affirmative defenses to the lawsuit. (d) On September 1, 2000, the Company filed a lawsuit against John Castellucci and Does 1 through 5, inclusive, in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC062993). The complaint was for cancellation of shares and of any share certificates issued to John Castellucci. On August 10, 2000, the Company and John Castellucci had entered into a Mutual Rescission Agreement and Mutual Release. Pursuant to said Mutual Rescission Agreement and Mutual Release, John Castellucci, the record holder of 9,900,000 shares of stock of the Company, evidenced by certificate number 160, was to surrender for cancellation said shares. The California Superior Court, on October 25, 2000, ordered that John Castellucci shall surrender for cancellation certificate number 160 to the Company or to the Company's transfer agent for cancellation and that said shares are to be restored to authorized but unissued status. It was further ordered that if Castellucci did not surrender for cancellation said certificate number 160 or cause said certificate to be surrendered, the Company may forthwith issue instructions to its transfer agent that said shares of stock are no longer to been deemed issued and outstanding, that said shares are to be restored to authorized but unissued status, and that the number of issued and outstanding shares of stock of the Company appearing on the Company's stockholder records are to be reduced by said 9,900,000 shares. Further, the California Superior Court determined that John Castellucci be deemed to not to have any right, title and interest in the 9,900,000 shares evidenced by certificate number 160. A copy of the order of the California Superior Court was delivered to the Company's transfer agent and said shares have been canceled. (See Note 3 above.) (e) At all times relevant, there have been no reports by any officer or director of the Company or any person who directly or indirectly is the beneficial owner of more than 10% of any class of equity securities of the Company registered under the Securities Act of 1934, as amended, filed with the Securities and Exchange Commission. Further, since the reporting provisions of 16(a) of the Securities Exchange Act of 1934, as amended, are designed to ensure the prompt disclosure of holdings, there are no provisions allowing the late filing of an ownership report and there is no extension of time for the filing of an ownership report. The California Superior Court was informed that there have been no reports filed with the Securities and Exchange Commission as it relates to the shares issued to John Castellucci and the shares held by a pledge holder as it relates to M. Mehdi Mostaedi or by M. Mehdi Mostaedi. NOTE 9. MUTUAL RESCISSION AGREEMENT AND MUTUAL RELEASE On December 10, 1999, the Company entered into a Plan and Agreement of Reorganization with LLO-Gas, Inc. and John Castellucci. On December 20, 1999, there was a closing under the Plan and Agreement of Reorganization and LLO-Gas, Inc. became a wholly owned subsidiary of the Company and there was a change of control of the Company. Between December 20, 1999 and August 11, 2000, differences of opinion as to matters of fact and as to matters of law have arisen by and between certain of the shareholders of the Company, who were shareholders prior to the closing, and between the Company, John Castellucci and LLO-Gas, Inc. In addition, on June 7, 2000, LLO-Gas, Inc. filed a Voluntary 27. Petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division, case number SV 00- 15398-AG. Said Chapter 11 Bankruptcy is currently pending and effects LLO-Gas, Inc. Predicated upon the -18- 19 DISCOVERY INVESTMENTS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS JUNE 30, 2001 AND DECEMBER 31, 2000 NOTE 9. MUTUAL RESCISSION AGREEMENT AND MUTUAL RELEASE (CONTINUED) differences of matters of fact and matter of law, the parties entered into a Mutual Rescission Agreement and Mutual Release. The Mutual Rescission Agreement and Mutual Release provides, inter alia, that the Company consents and agrees to rescind that certain Plan and Agreement of Reorganization with John Castellucci consenting and agreeing to the rescission. The parties mutually agreed, pursuant to said Mutual Rescission Agreement and Mutual Release to forgo all rights and benefits provided to each other under the Plan and Agreement of Reorganization, as consideration for the rescission, ab initio, of the closing described therein. NOTE 10. SUBSEQUENT EVENTS On August 8, 2001, the Company filed Chapter 11 proceeding under the Bankruptcy Code (title 11, United States Code) with the United States Bankruptcy Court, District of Nevada. The Company will file a motion to confirm a Plan of Reorganization ("Plan"). Chapter 11 allows the Company to reorganize or liquidate pursuant to this plan. Under the plan, the Company intends to raise funds through shareholder loans and issuance of authorized, unissued stock. These funds will be used to pay administrative claims from the filing and create a "pot distribution" that will be shares by the impaired creditors of the Company. The Company intends to continue operations after acceptance of the Plan of Reorganization. -19- 20 Item II. Management's Discussion and Analysis or Plan of Operation The Company currently is contemplating the filing of a Chapter 11 proceeding under the Bankruptcy Act (See Item 5(a) below). The Company is now dependent upon its officers to meet any de minimis costs which may occur. Kimberly Lynn Jack, an officer and director of the Company, has agreed to provide the necessary funds, without interest, for the Company to comply with the Securities Exchange Act of 1934, as amended; provided that she is an officer and director of the Company when the obligation is incurred. All advances are interest-free. In addition, since the Company has no current operating history nor any revenues or earnings from operations, with no significant assets or financial resources, the Company will in all likelihood sustain operating expenses without corresponding revenues, at least until the consummation of a business combination. This may result in the Company incurring a net operating loss which will increase continuously until the Company can consummate a business combination with a profitable business opportunity and consummate such a business combination. This discussion may contain certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those forward-looking statements. The factors that may cause actual results to differ materially is that the Company has no arrangement, agreement or understanding with -20- 21 respect to engaging in a merger with, joint venture with or acquisition of, a private or public company and that there can be no assurance that the Company will be successful in identifying and evaluating suitable business opportunities or including a business combination. Item III. Qualitative and Quantitative Disclosures About Market Risk The Company has neither considered or conducted any research concerning qualitative and quantitative market risk. PART II OTHER INFORMATION Item 1 - Legal Proceedings (a) On February 29, 2000, West Star Energy Group, Inc. ("West Star") sued John D. Castellucci, the Company and its wholly-owned operating subsidiary, LLO-Gas, Inc., in the Superior Court of the State of California, County of Los Angeles (Case Number BC 225568). Until August 10, 2000, John D. Castellucci was President, Chief Financial Officer, Secretary, director and the principal shareholder of the Company, and President, a director and the principal shareholder of West Star. West Star, through its Board of Directors (other than John D. Castellucci), alleges that John D. Castellucci breached his fiduciary duty to West Star and engaged in a series of unauthorized transactions for his personal benefit. The plaintiff also alleges that John D. Castellucci made certain fraudulent statements to the West Star Board of Directors, which induced them not to exercise a West Star business opportunity to acquire the ARCO Facilities for itself and to consent to the acquisition of the ARCO Facilities by LLO-Gas, Inc. On April 26, 2000, West Star dismissed the entire action as to all parties with prejudice. West Star had sought general and special damages of $3.5 million against John D. Castellucci, the imposition of a constructive trust on the Company's facilities which were purchased from ARCO (the "ARCO Facilities"), an order compelling the Company to return the ARCO Facilities, an accounting, and the costs of the suit, prejudgment interest, attorneys' fees and such other relief as the court may deem just and proper. (b) In December 1999, M. Mehdi Mostaedi loaned LLO-Gas, Inc. $150,000. LLO-Gas, Inc. and John D. Castellucci jointly executed a promissory note dated December 16, 1999 (the "Mostaedi Note") in the principal amount of $150,000. The Mostaedi Note bears interest at the rate of 9% per annum and was -21- 22 due and payable as to principal and interest on February 16, 2000. The Mostaedi Note was secured with a pledge of 2,000,000 shares of the Company's common stock owned by John D. Castellucci pursuant to a Pledge Agreement dated December 20, 1999 between John D. Castellucci and M. Mehdi Mostaedi. On April 11, 2000, M. Mehdi Mostaedi filed a lawsuit against the Company and John D. Castellucci in the Superior Court of the State of California, West District, Santa Monica, California (Case Number SC 016250), alleging breach of contract and default under the Mostaedi Note. M. Mehdi Mostaedi sought damages in the amount of $150,000, interest on that amount at the rate of 9% from December 16, 1999, and costs of the suit. The Company had been served with the complaint but did not filed an answer to the complaint. On or about August 17, 2000, M. Mehdi Mostaedi filed a request to enter the default against the Company (and John D. Castellucci). On May 31, 2001, Judgment was entered, after default, by the Court, in favor of M. Mehdi Mostaedi and against John D. Castellucci and Company (LLO-Gas, Inc. and the Doe defendants were dismissed). Judgment was for the principal sum of $150,000, interest through May 31, 2001 of $13,610.96, attorneys' fees of $3,290.00 for a total of $166,900.96, with costs of $267.00. The Company disputes the existence of the obligation and no notice of entry of judgment has been served upon the Company. M. Mehdi Mostaedi may be required to file a proof of claim in the Chapter 11 proceeding (See Item 5) to have any rights adjudicated. Item 2 - Changes in the Rights of the Company's Security Holders ..........None Item 3 - Defaults by the Company on its Senior Securities .................None Item 4 - Submission of Matter to Vote of Security Holders .................None Item 5 - Other Information On August 8, 2001, the Company filed a proceeding under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, District of Nevada, case number 01-18156 rcj, 300 Las Vegas Boulevard South, Las Vegas, Nevada 89106. Said bankruptcy proceeding was required predicated upon the Company's present lack of operations, assets or financial -22- 23 resources to defend against those creditors claiming potential obligations or contingent obligations from the Company, in connection with the period of time that LLO-Gas, Inc. was a wholly-owned operating subsidiary of the Company. In furtherance of the filing of the Chapter 11 proceeding, the Company prepared a Disclosure Statement and Plan of Reorganization ("Plan") which was furnished along with a ballot, prior to the commencement of a Chapter 11 proceeding, in connection with a selected solicitation by the Company of consents and acceptances by certain creditors and interest holders to the Plan. The majority shareholders of the Company, who are also directors, have approved the Plan and the Company is the proponent of the Plan. The Plan is intended to treat the claims of the Company's creditors and the interests of the shareholders and to reorganize the Company's business affairs. It is believed by the Company that the Bankruptcy Court will approve the Plan and the Company will file a motion for an order confirming the Plan. The Motion will be served upon all impaired creditors and shareholders who reject the Plan and on the Office of the United States Trustee. The Company will cause to the circulated to all creditors and interested parties, along with the Plan, a copy of the Form 10-KSB/Amendment No. 1 filed with the Securities and Exchange Commission which contains a description of the business and year end financial statements. The implementation of the Plan was contingent upon the commencement of a proceeding under Chapter 11 of the Bankruptcy Act. If the Court finds that the disclosure statement is adequate and the Plan and the solicitation otherwise complies with all statutory requirements, the Plan will be confirmed. It is intended by the Company that the Plan be deemed to be a so-called "cram-down" proceeding. The only sources of money and property available to pay creditors of the Company, under the Plan, will be funds derived from shareholder loans and the issuance of 100,000 shares of authorized and unissued stock. Upon the funding of the shareholder loan, the Company will have sufficient funds to pay its Chapter 11 administrative claims in full and otherwise perform under the Plan. All remaining loan funds will be allocated to the impaired creditors as a "pot distribution," a single fund of monies for the creditors to share pro-rata, along with a pro-rata share of 100,000 shares of common stock of the Company which is unregistered. No monies or shares will be allocated to the class of shareholders. The creditors shall not be entitled to receive any additional funds, and the remaining unpaid amount for each creditor's claim will be deemed discharged. -23- 24 As a condition of receiving shares, each creditor who receives shares must agree that said shares are being acquired for investment purposes only and not with a view towards resale or redistribution in violation of state and federal securities laws, including the Securities Act of 1933, as amended. Acceptance of the shares by the creditor, under the Plan, and the failure to return said shares within ten (10) days after mailing by the transfer agent or a designated disbursing agent shall be deemed acceptance of the investment intent. Any shares returned will be returned to the Company for cancellation and any creditor who returns said shares will be considered to have received its full entitlement under the Plan despite the return. The creditors can expect payment within 60 days after the Plan has been confirmed by the Company. Item 6 - Exhibits and Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2001 DISCOVERY INVESTMENTS, INC. (Registrant) By: /s/ Kimberly Lynn Jack -------------------------------------- Kimberly Lynn Jack President -24-